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K.S. Badri Narayanan

LAST week saw the settlement of December contracts and the introduction of March series in the derivative segment.

Rollover of open interest positions to January series was at an impressive level. More than 70 per cent of the open positions in Nifty index futures were rolled over; the number for stock futures was in excess of 80 per cent.

A modest 50 per cent of positions were rolled over in the CNX-IT futures contract.

With the Nifty benchmark registering new highs, trading activity was brisk; the average daily turnover last week rose to Rs 14,089 crore against the previous week figure of Rs 11,586 crore.

Nifty outlook: Last week, we had anticipated that the Nifty would maintain its momentum. As expected, the Nifty sustained the bullish momentum.

For the coming week also, we expect the Nifty to remain in the bull orbit as sentiment indicators such as implied volatility, put/call ratio and cost-of-carry indicate such a trend.

However, we advice traders to operate with adequate stop-loss triggers, as the run-up in the Nifty have been quite rapid in the last few days. So the possibility of a correction cannot be ruled out.

Volatility view: The implied volatility (IV) for both Nifty calls and puts dipped from the previous week levels; IV for calls remained slipped to 15 per cent (17 per cent), while that of puts dipped to 14 per cent (18 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks; the sharp dip in puts IV (vis-à-vis calls IV) indicates limited downside while the marginal drop in calls IV suggests market might maintain current momentum with marginal corrections here and there. The annualised volatility on Nifty stands at 16.1 per cent.

Put/call ratio: The volume-wise PCR declined further to 0.51 from the previous week levels 0.63; the same on open positions basis witnessed a sharp decline to 0.80 (1.48). Open-wise PCR has declined to less than one after a protracted period. This indicates that traders, who used to buy puts as a hedge against long spot/futures position, did not continue their puts positions as they perhaps expect that there would not be a sharp decline in the Nifty.

Fair value: The fair value of the Nifty January contracts (without considering dividend yields) works out to about 2096 against its Friday's close of 2087.2 (assuming interest rate at 6 per cent).

The fair value of February contracts stood at 2105 (approximate) against spot close of 2086.55 and the March contracts at 2114 (approx) against spot close of 2084.80. This indicates that farther-month contracts are fairly under priced to the spot levels and buying them may be beneficial.

Basis: The Nifty January futures closed in premium to the spot close; it now trades at a premium of 6.7 points to the spot close. Cost of carry also turned positive. These is a positive signal, as traders are now willing to pay premium to carry over their positions. The Nifty February futures now trade at a premium of 6.05 points to the spot.

Index movement: Last week, the Nifty gained 0.81 per cent to close at all-time high levels of 2080.5 against the preceding week close of 2062.70.

Stock futures: Reliance was the most active among the individual stocks. Contracts on Tata Steel, Satyam Computer, SBI, Tata Motors, ACC, Infosys and TCS were the other actively traded contracts. Apart from these, Arvind Mills and Canara Bank also sneaked into the list of briskly traded contracts.

Most contracts witnessed a substantial rollover of open interest positions; in contracts such as Hindalco, Cipla, Nalco and NTPC, 90 per cent of open positions were rolled over.

Most contracts are quoting at a premium to their respective spot close and premiums have also widened.

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